Asia Briefing

Labor Case Study: Social Insurance Contribution in China

A pharmaceutical company establishing operations in China was approached by an employee with a request regarding social insurance payments. “Mr. B” joined the company in August 2011 as a salesman. Before inking the labor contract, the company and Mr. B signed a letter of commitments including the following:

Mr. B voluntarily requests the employer to not pay social insurance premiums during his employment, and agrees to accept the allowance from the company directly.

Mr. B agrees to not terminate the labor relationship or claim severance due to the company’s nonpayment of his social insurance premiums.

Mr. B signs the letter of commitments of his own free will and it will become effective on the date of signing by both parties.

In September 2013, Mr. B mailed a notice to the company to terminate the labor relationship on the grounds of the company’s nonpayment of his social insurance premiums. Thereafter, Mr. B filed the case with labor arbitration, demanding the company pay him two years’ worth of severance and social insurance contributions.

Although the company presented the letter of commitments as evidence in its defense, the Arbitration Committee ruled that the company was at fault and obligated to pay severance and social insurance to Mr. B for his two years of employment.

In accordance with the Social Security Law of the PRC, the employer and employee must jointly contribute to the basic pension insurance, basic medical insurance, work injury insurance, unemployment insurance, and maternity insurance. Employers must declare and promptly pay social security premiums in full, and social security premiums payable by employees must be withheld by their employer. Employers who fail to promptly contribute social security premiums in full will be ordered by the social security premium collection agency to make or supplement contributions within a stipulated period, and will be subject to a late payment fine calculated from the due date at the rate of 0.05% per day. Where payment is not made within the stipulated period, the relevant administrative authorities will impose a fine ranging from one to three times the amount in arrears. Based on the above stipulations, both the employer and employee are required to contribute social insurance premiums.

According to Article 52 of the PRC Labor Contract Law, a contract where illegal intentions are concealed beneath an appearance of legality or where the mandatory provisions of laws and administrative regulations are violated shall be null and void.

In this case, Mr. B signed a letter of commitments voluntarily renouncing the employer’s obligations to contribute social insurance premiums. This letter of commitments was deemed signed by the employer to avoid its legal obligations, which is in violation of the mandatory provisions of PRC laws. Thus, the letter of commitments was null and void.

In addition, according to Article 38 of the PRC Labor Contract Law, where the employer fails to contribute social insurance premiums for the employee pursuant to the law, the employee may rescind the labor contract. Further, pursuant to Article 46, the employer is obliged to pay severance to the employee.

Since the PRC Labor Contract Law came into effect, many labor disputes have emerged relating to employers failing to contribute social insurance premiums for employees pursuant to the law. In this situation, since the employer is legally at fault, the employee has the right to terminate the labor contract unilaterally and demand the employer pay severance. The employer also must bear the additional cost of violating the law. It is essential for employers to avoid contravening China’s complex labor laws and regulations. When a new employee is hired, it is up to the employer’s human resources personnel to transfer the employee’s social insurance account from his previous company to the new one within the first month of employment; thereupon the employer can contribute social insurance premiums for the employee in a timely manner.

Since its establishment in 1992, Dezan Shira & Associates has been guiding American investors through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, including liaison offices in Boston and Waltham specifically established to support our American clients, we are your reliable partner for business expansion in Asia and beyond. For inquiries, please email us at [email protected]. For further information about our firm and how we can support American investors in Asia, please visit our North American Desk.